Principles of Finance

FINN 100

Quiz 2 *

Roll Number: ___________

Total Marks: 25
Time Allowed: 45 minutes

Instructions:
Show workings for all MCQs on the side to get full credit.
Calculator sharing is not allowed.
Time value of money tables are allowed. However, make sure there is nothing written on
them or else you will be penalized.
1) You want to buy an ordinary annuity that will pay you Rs. 4,000 a year for the next 20 years. You
expect annual interest rates will be 8 percent over that time period. The maximum price you would be
willing to pay for the annuity is closest to:
a) Rs. 32,000
b)Rs. 39,272
c) Rs. 40,000
d) Rs. 80,000

2) Suppose an investor wants to have Rs. 10 million to retire 45 years from now. How much would she
have to invest today with an annual rate of return equal to 15 percent?
a) Rs.18,561
b) Rs.17,844
c) Rs.20,003
d) Rs.21,345

3) Shaharyar plans to invest an equal amount of Rs. 2,000 in an equity fund every year-end beginning
this year. The expected annual return on the fund is 15 percent. He plans to invest for 20 years. How
much could he expect to have at the end of 20 years?
a) Rs.237,620
b) Rs.176,424
c) Rs.204,887
d) Rs.178,424

4) To triple Rs. 1 million, Ahmed invested today at an annual rate of return of 9 percent. How long will it
take Ahmed to achieve his goal?
a) 15.5 years
b) 13.9 years
c) 12.7 years
d) 10 years

5) Which of the following is false?

a) The longer the time period, the smaller the present value, given a Rs.100 future value and holding
the interest rate constant.
b) The greater the interest rate, the greater the present value, given a Rs.100 future value and holding
the time period constant.
c) A future dollar is always less valuable than a dollar today if interest rates are positive.
d) The discount factor is the reciprocal of the compound factor.
6) A security is currently selling for Rs 8,000 and promises to pay Rs 1,000 annually for the next 9 years,
and Rs 1,500 annually in the 3 years thereafter with all payments occurring at the end of each year. If
your required rate of return is 7% per annum, should you buy this security?
a) Yes, because the return is greater than 7%
b) No, because the return is less than 7%
c) Yes, because the return is 7%
d) Yes, because the present value at 7% is less than Rs.8,000.
e) There is insufficient information provided to answer this question

7) You have just received an advertisement from Corleone Inc., a paycheck loan service. Corleone will
charge you a fee of 5% for a two-week loan (i.e. if you borrow Rs 100, you must repay Rs 105 in two
weeks time). Assuming a 52 week year, what is the Effective Annual Rate (EAR) that Corleone charges
(rounded to the nearest whole percent)?
a) 130%
b) 356%
c) 5%
d) 256%
e) 230%

8) You are considering two perpetuities which are identical in every way except for when the perpetuity
payments will begin. Perpetuity A will begin making annual payments of a fixed amount, with the first
payment being made two years from today. Perpetuity B pays the same fixed annual payment, but will
make the first payment one year from today. Which of the following statements is most correct?
a) The PV of perpetuity A is greater than the PV of perpetuity B by the amount of the fixed
payment.
b) The PV of perpetuity B is greater than the PV of perpetuity A by the amount of the fixed
payment.
c) The PV of perpetuity A is equal to the PV of perpetuity B.
d) The PV of perpetuity A is greater than the PV of perpetuity B by the present value of the amount
of the fixed payment.
e) The PV of perpetuity B is greater than the PV of perpetuity A by the present value of the amount
of the fixed payment.

9) Your neighbor offers you an investment opportunity which will pay a single lump sum of Rs. 2,000 five
years from today. The investment requires a single payment of Rs. 1,500 today. What is the annual rate
of return on this investment?
a) 5.71%
b) 5.92%
c) 6.18%
d) 6.67%
e) 33.33%
10) If you place Rs.50 in a savings account with an interest rate of 7% compounded weekly, what will the
investment be worth at the end of five years (round to nearest dollar)?
a) Rs.72
b) Rs.70
c) Rs.71
d) Rs.57

11) A given rate is quoted as 12% Annual Percentage Rate, but has an effective annual rate (EAR) of
12.55%. What is the frequency of compounding during the year?
a) Annually
b) Semiannually
c) Quarterly
d) Monthly
e) Daily

12) In a typical loan amortization schedule, the total dollar amount of money paid each period .
a) Increases with each period
b) Decreases with each period
c)Remains constant with each period

13) In a typical loan amortization schedule, the dollar amount of interest paid each period .
a) Increases with each payment
b) Decreases with each payment
c) Remains constant with each payment

14) What is the value on 1/1/85 of the following cash flows:

Date Cash Received Amount of Cash
1/1/87 Rs.100
1/1/88 Rs.200
1/1/89 Rs.100
1/1/90 Rs.100
1/1/91 Rs.100
Use a 10% discount rate, and round your answer to the nearest Rs.10.
a) Rs.490
b) Rs.460
c) Rs.420
d) Rs.450

15) You are going to pay Rs.100 into an account at the beginning of each of the next 40 years. At the
beginning of the 41st year you buy a 30 year annuity whose first payment comes at the end of the 41st
year (the account pays 12%). How much will you receive at the end of the 41st year (i.e. the first annuity
payment). Round to nearest Rs.100.
a) Rs.93,000
b) Rs.7,800
c) Rs.11,400
d) Rs.10,700
16) The Dean of LUMS wants the ACF class of 2010 to donate money for the building of a new business
school. The estimated cost of the building is Rs. 10,000,000/- and this amount must be donated in 5
years time. Since no one graduate can donate so much themselves, the Dean has asked the students to
give a portion of their monthly salaries to get the required amount. All proceeds will be put in Citibanks
Gold Account which pays 12% per annum, compounded monthly. If 60 students agree to this plan, how
much must each pay per month? (5 marks)
17) You have just graduated and have decided to buy a brand new Honda City. You can choose from
either of 2 banks and you prefer the plan which costs you less per month.

Cost of Car: Rs. 18,000,000

HBL Apni Car: No down payment, full financing and interest rate 20% per annum for 5 years

Faysal Bank Car 4 U: 20% down payment, 80% financing and 15% per annum interest for 6 years

Assume both banks compound interest monthly.

Which bank would give you a lower monthly payment? (5 Marks)